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Bounce Back Loans Guarantees and Liquidation

Bounce Back Loan Guarantees and Liquidation. Author: John A Waller, Director. Reviewed December 14th,2023.

Bounce Back Loans Guarantees and Liquidation. Ensure you understand your Liability.

The UK Government provided 100% security to banks for loans taken out under the BBLS. Nevertheless, the company remains responsible for commencing the lone one year after receiving the money. Therefore should the company wnter an insolvency, the bbl is considered an unsecured loan.

However, the first twelve months did not require repayment of capital or interest and could extend on request.

A unique feature of a BBL enabled borrowers not to guarantee the loan. Should the company fail, directors remain not liable for repayment.

The UK government guarantees the Bounce Back Loan if defaulted, not you, the borrower.

The company becomes insolvent and initiates formal insolvency proceedings, including the creditor’s voluntary liquidation. The company remains responsible for repaying the bounce back loan. It cannot be transferred to directors or other shareholders unless they fulfil their legal and fiduciary duties. Therefore, no risk to the director’s assets or individual creditworthiness if his company cannot repay the loan.

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Bounce Back Loan Guarantees and Liquidation – What is a Bounce Bank Loan?

The government introduced the Bounce Back Loan Scheme (BBLs) to criticism that the Coronavirus Business Interruption Loan Scheme (CBILS) wasn’t quick enough for small businesses.

Therefore, the scheme allowed companies to access loans faster, allowing 25% of turnover, up to £50,000. However, once received, the loans remain interest-free for 12 months while the UK government underwrites them. Above all, the company’s directors do not have to provide personal guarantees to secure the funds. Bounce back loans ceased on March 31st, 2021.

What can directors use a bounce-back loan for?

  • Directors must then use the loan to bring economic benefits to their business, including boosting its working capital and promoting its cash flow. Company Directors can use the loan to:
    • Pay salaries, though, not to add to nor pay dividends unless sufficient profit remains on the balance sheet.

For further reading, please view the following web pages on our website:

Can I liquidate with a Bounce Back Loan?

The simple answer is yes.

Perhaps the most often said remark by company directors remains can I liquidate with an unpaid bounce back loan?

So if your company cannot continue repayment of the Bounce Back Loan, it is likely insolvent, as it may no longer pay bills when due. Importantly: So, take care when contemplating preference payments.

Bounce Back Loans Guarantees and Liquidation – An undertaking in difficulty

One of the critical clauses in the agreement for applying for a bounce-back loan remains for the directors to confirm their company appears not to be an undertaking in difficulty. The Insolvency Act 1986 defines this as:

  • A limited company (The Business) remains unable to pay its debts (Creditors Loans and other obligations) as and when they fall due;
  • Assets of the company;
  • The company’s assets remain less than its liabilities.

The loan document requests that company directors confirm their business remains a viable concern. Directors must not apply if they have prior knowledge of its insolvency. If the latter remains the case, then:

The British Business Bank website details, ‘The borrower remains 100% liable for repaying the loan and any interest.’

Quote from the British Bank:

“The definition of ‘undertaking in difficulty‘ includes businesses that: had accumulated losses greater than half of their subscribed share capital (for limited liability companies) or capital (for unlimited liability companies)”.

What steps should you consider to avoid personal liability for Bounce Back Loans?

The Bounce Back Loan Scheme supports small businesses financially affected by the Coronavirus COVID-19 pandemic and struggles to repay their debts. However, some companies will still fail with this additional funding, and company directors may be concerned about the loan’s potential implications.

Notably, a bounce-back loan will not prevent you from liquidating your business as usual. 

So what happens if you can’t pay back your bounce back loan? 

Subject to the loan use, the liquidator will repay its debts from the sale of assets, and any remaining debt, written off. The insolvency practitioner appointed must examine how directors manage the business. However, you should have no issues as long as you have performed your director’s duties and not misused the bounce back loan.

What happens if you fail to pay back a Bounce Back Loan?

What can you do to avoid personal liability for Bounce Back Loans?

The Bounce Back Loan Scheme helped small businesses financially affected by the coronavirus COVID-19 pandemic. The scheme supported struggling businesses throughout the UK to pay their debts.

But even with this additional funding, many companies fail, causing directors’ concerns.

Notably, a bounce-back loan will not prevent you from liquidating your business, provided you used the BBL as per the terms and conditions you agreed to. The BBL was to pay company debts to enable the business to trade to pay creditors. The insolvency practitioner will commence an investigation, but as long as you have fulfilled your director’s duties and the bounce-back loan is not misused, you should not have any issues.

Potential for company director’s personal liability for a Bounce Back Loan?

Directors of the company remain personally responsible for ensuring a bounce-back loan repayment if their limited company liquidates.

One of two scenarios exits:

  • Use of funds not used following the loan agreement terms of use.

Company directors risk liability personally when the funds remain used, not as per the loan agreement.

Suppose you used the Bounce Back Loan for:

  • Personal debts; 
  • Purchase of holiday home, Caravan, Motorhome or other personal property;
  • Repay a director’s loan account. 

All three above have no economic benefits for the company.

Therefore, it is an act of misfeasance, exposing the directors to personal liability to repay the outstanding loan. 

  • Preferential payments to company creditors’

Company directors managing and operating a limited company must ensure creditors remain protected when they have cash flow difficulties and their position does not worsen.

Directors who have used the Bounce Bank Loan as a preferential payment to company creditors, leaving other creditors unpaid, remain at risk.

Additionally, repaying any debts owed to family or other connected creditors, knowing HMRC remain unpaid, directors remain at risk and may be considered a preference.

Bounce Back Loans Guarantees and Liquidation – Comprehending preference payments

Directors of limited companies can also use the loan to refinance existing loans. Be careful, though, if you plan to do so. Paying off debt personally guaranteed is treating that payment as a preference. 

For example, a company owing various debts decides to use the Bounce Back Loan only to repay the debt guaranteed personally by the director, ignoring the debt they have not secured. Therefore, preference has occurred.

A director opts to repay guaranteed debt, i.e., the director remains personally liable in liquidating a company. Therefore, unsecured creditors remain unpaid, considered an act of misfeasance.

Bounce Back Loan Guarantees and Liquidation – My business needs funding, but I don’t want a loan.

When considering additional borrowing for your company, you need to be clear about using the money. However, this will ensure you receive the appropriate funding and help you select a proper type of budget. 

While loans remain advantageous in many cases, some companies may benefit from exploring alternative financing options. Companies with an account book of unpaid invoices may be better suited to discount or factoring, allowing access to a percentage of the money invoiced but not yet paid (Debtors). So this can help lower money concerns, contribute inevitability to directors, and better cash flow management. This type of funding is hugely flexible, and unlike a Bounce Back Loan, the company can turn it off once the need passes rather than being subject to a loan agreement for six years.

Can a Bounceback Loan be written off?

Bounce-back loans remain paid to a limited company, not you as an individual. Therefore, if your company enters any form of insolvency, including:

Then the bank, once notified, shall write off the loan.

However, using the loan for other purposes than the purpose of the loan exposes directors to repay it. Any fraudulent use of the money will require the appointed Liquidator or Administrator to investigate the transaction further.

If proven, the veil of incorporation no longer protects directors, and you remain liable personally. Once confirmed, the insolvency practitioner may prompt disqualification to stop you from acting as a company director. The misuse may be considered THEFT!

So when worried about your situation. Ensure you approach a firm that can deal with your company’s issues, ensuring the best results for the company’s creditors while protecting you as a director.

Please act quickly if your business remains no longer viable. Time does not heal with a failed company.

Can I dissolve a company with an unpaid Bounce Back Loan?

No! You legally can’t dissolve a company with a bounce back loan.

Bounce back loans have now ceased with effect Midnight March 31st,2021.

Companies become insolvent as cash dries up without a revenue stream to support fixed operational costs. So what should directors do? Can they dissolve their company with a bounce-back loan still not repaid?

Don’t hesitate to contact HBG ADVISORY FOR IMMEDIATE ADVICE & SUPPORT ON 0330 056 3120.

HBG Advisory opens seven days a week. Can meet online in confidence to answer questions you may have about bounce-back loans. 

Can you close a company with a Bounce Back Loan?

YES, though closure must be by an insolvency practitioner.

However, you may allow an unpaid creditor, like HMRC, to issue a winding-up order and have your company closed by compulsory liquidation if approved by the courts.

As for bounce back loans, they remain no different from any other debt, except not personally guaranteed. Therefore, it means neither your home nor you remain at risk. 

So, when realising your business is insolvent, you should seek immediate advice without fear of personal issues before trading on insolvent.

To consider dissolving your company requires your company to be solvent (paying all its debts). Simply striking your company off when insolvent at the company house is illegal and may be reinstated. An insolvent company requires liquidation by a licensed Insolvency Practitioner.

What happens if you dissolve a limited company with a Bounce Back Loan?

Attempting to strike off your company while insolvent or with debts owed usually prompts an objection to the company strike-off notice.

So, shows Companies House noted your company’s unpaid debts. Usually, the debt relates to those owed to HMRC.

However, the lenders rejected the loan, even though HMRC guarantees the loan. 

Therefore, the lender retains the ultimate duty to chase the loan if unpaid.

So directors wishing to strike off their company also require a statutory notification of any other creditors.

Can HMRC restore a dissolved limited company?

YES.

HMRC often reinstates limited companies if they have not given clearance to dissolve the company.

Under Section 1003 (6) of the Companies Act, UK company law specifies that an insolvent struck-off company may be reinstated. The liability of every director, managing officer and company member remains and may be enforced as if the company had stayed on the registrar at the company house. 

What is the right way to terminate a limited company with a Bounce Back Loan Debt?

Via a voluntary liquidation if insolvent. A licensed Insolvency Practitioner is appointed and deals with the company’s creditors, along with realising the company’s assets.

The striking off of a limited company is when you dissolve it, and removal takes place from the register at companies house. This approach is considered an informal process compared with liquidation.

Once a company’s name remains removed from the register, it no longer exists as a legal entity. Therefore, the former directors have resigned and held no fiscal responsibility for debts unless guaranteed personally.

Strike off is a straightforward way to close a limited company with neither assets nor liabilities, rather than for insolvent limited companies that need a liquidation.

So, a director of an insolvent company can submit the strike-off application (DS01) online. Therefore, an insolvent company can close via this process, subject to no objections. It is important to note that a strike-off is not a liquidation; no investigation into the company’s affairs once dissolved. Therefore differing from liquidation, where an investigation forms the closure process.

Strike-off is not an option with a bounce-back loan.

Since the Coronavirus COVID-19 pandemic, the UK government has issued billions of support to bounce back loans businesses. However, legislation will ensure the insolvency service will investigate companies with outstanding bounce back loans either through liquidation or attempting to strike their company off.

Notably, the UK government urges banks to object to any strike-off application made by a company with an outstanding bounce-back loan. Using this method, an objection to a strike-off application would prevent the company from being formally closed. 

Bounce Back Loans, Liquidation and Guarantees – In summary

The Bounce Back Loan Scheme (BBLS) supports UK businesses struggling with debt sustained by the current COVID-19 pandemic. Due to the prolonged pandemic, companies with bounce-back loans face insolvency and need liquidation. Many directors remain concerned about their future and the effects of liquidating a company.

A bounce-back loan does not prevent you from liquidating your business. The directors of the company consider the loan unsecured. The company’s directors will not be personally liable for the loan unless your liquidator finds you have fraudulently traded or abused the scheme.

So ensure you understand the consequences of not repaying a bounce-back loan‘.

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